U.K. Pound Weakens to Nine-Month Low Versus Euro; Gilts Decline

By Lucy Meakin -
Jan 17, 2013

The pound weakened to a nine-month
low against the euro as investors favored assets in the 17-
member currency region, betting they will outperform those in
the U.K.

Gilts dropped for the first time in five days as Spanish
and Irish borrowing costs declined at debt sales, damping demand
for safer assets. Sterling also declined against the euro as
U.K. Prime Minister David Cameron prepares to give a speech in
the Netherlands tomorrow in which he’ll call for the U.K. to get
powers back from the European Union. The pound fell for a fifth
day versus the dollar.

“It’s a story of euro strength,” said Steven Barrow, head
of Group-of-10 research at Standard Bank Plc in London.
“Against the pound what tends to drive that is not just an
improvement in sentiment towards the euro and the euro-zone
crisis, but also a sense that if this pressure continues to
lift, money-market conditions may tighten in the euro zone.”

Sterling depreciated 0.7 percent to 83.58 pence per euro at
4:30 p.m. London time, after reaching 83.65 pence, the weakest
since March 29. The pound slid 0.2 percent to $1.5976 after
dropping to $1.5955, the least since Nov. 23.

The U.K. economy contracted in the fourth quarter and may
risk slipping back into recession in the first three months of
2013, according to an e-mailed report from London-based Fathom
Financial Consulting today.

‘Underlying Weakness’

“Whether growth in Q4 turns out to have been slightly
positive, or slightly negative, the picture remains one of
underlying weakness,” the report said. “Whichever way you look
at it, the U.K. economy continues to bump along the bottom.”

The National Institute of Economic and Social Research,
whose clients include the Bank of England and the U.K. Treasury,
estimate Britain’s economy contracted 0.3 percent in the fourth
quarter, it said on Jan. 11.

“In sterling there’s a lot of weakness coming through,”
said Eimear Daly, a currency-market analyst at Monex Europe Ltd.
in London. “I think we are going to see it much lower. As the
safe-haven trade wears off, people are starting to look at the
fundamentals of the U.K. economy.”

She spoke in an interview on Bloomberg Television’s “The
Pulse” with Guy Johnson.

The pound has lost 1.8 percent this year, the third-worst
performance after the Japanese yen and Swiss franc, according to
Bloomberg Correlation-Weighted Indexes, which track 10
developed-market currencies. The euro advanced 1.4 percent and
the dollar was little changed.

‘Growing Uncertainties’

“One factor behind sterling underperformance may be the
U.K. political outlook, and specifically the growing
uncertainties surrounding the country’s relationship with the
EU,” Shahab Jalinoos, a senior currency strategist for UBS AG
in Stamford, Connecticut, wrote in e-mailed report. “That this
is happening at time when political risk is diminishing in the
euro area is a further problem for the pound as it may lead to a
reversal of safe-haven flows seen in 2011-2012.”

Business Secretary Vince Cable will say in a speech today
Cameron would put the economy at risk if he raises the prospect
of a British exit from the EU, according to his office.

Cameron’s stance is unlikely to weaken demand for the
British currency, according to Nick Beecroft, chairman of Saxo
Capital Markets U.K. Ltd.

“I’m struggling to find a market relevance with regards to
the U.K.’s position vis-a-vis the EU,” Beecroft said at a
presentation in London today. “The only thing that could bring
sterling dramatically down is an about-face from the government
with regards to the austerity plan.”

Gilts Fall

The 10-year gilt yield climbed four basis points, or 0.04
percentage point, to 2.04 percent after falling to 1.98 percent
yesterday, the lowest level since Jan. 3. The 1.75 percent bond
maturing in September 2022 dropped 0.36, or 3.60 pounds per
1,000-pound face amount, to 97.475.

The Debt Management Office sold 1 billion pounds of
inflation-linked securities maturing in 2029 at a so-called real
yield of minus 0.367 percent.

The yield on U.K. 10-year index-linked gilts climbed four
basis points to minus 1.03 percent, after earlier dropping to a
record low of minus 1.08 percent.

Gilts handed investors a loss of 1.2 percent this month
through yesterday, according to indexes compiled by Bloomberg
and the European Federation of Financial Analysts Societies.
German bonds also dropped 1.2 percent and Treasuries fell 0.2
percent.